By Thomas Kostigen
Many investors eyeing the cryptocurrency market usually stay focused on the two benchmarks, bitcoin and Ethereum. But those are just index options. There are individual cryptocurrencies across a broad spectrum of markets, thousands that represent businesses, ideas, and industry sectors. And many of these cryptocurrencies, as might be expected, far outperform the indexes.
In 2019, Cointelegraph reported that ChainLink was the best performing cryptocurrency. The value of its token rose some 500 percent compared to the US dollar over the year. Binance Coin was the year’s second-best performer. Its value more than doubled for the year. And Tezos was the next best performer, rising 190 percent during the same period. All of the underlying businesses for these cryptocurrencies involve facilitating payments, transactions, or verification processes. In other words, they are all engaged in the back-office business of cryptocurrency operations.
In our last column we discussed some of the primary reasons for investing in cryptocurrencies. Outside of an investment, there are still several reasons for buying and selling crypto. As a form of payment, cryptocurrency provides a great deal of security. There is no political risk that a country’s currency—say the US dollar or the Chinese yuan — will fluctuate up or down in value. Cryptocurrency operates entirely outside traditional factors that make a currency rise or fall.
Crypto holdings are also anonymous. The holder of cryptocurrency is represented by an individual numerical code. That means identity theft is far more difficult than it might be if, for example, a bank or brokerage firm’s system were hacked.
Finally, and importantly, cryptocurrencies are more efficient: Transaction fees and the like all largely disappear with cryptocurrency. Wire transfers, merchant fees, and account costs are nonexistent because each crypto transaction is point to point, from user to user.
The convenience of cryptocurrency is also something to note. Crypto is a digital asset and is typically held in a digital wallet. That means your smart device or computer becomes your bank. Everything is held outside of an institution. But let’s get real and look at an example of how and why you might want to have crypto holdings beyond the objective of making a hefty return on an investment.
If you are making a payment outside the U.S. or are traveling, cryptocurrency can be a less risky and less expensive option than trading one currency for another. There are big fees in currency trading, as anyone who has visited a currency exchange kiosk can attest. Additionally, the price of one currency rising or falling against another, as previously noted, is moot with cryptocurrency. Cryptocurrency is digital, so you don’t have to worry about carrying cash or withdrawing money from an institution. And finally, cryptocurrency is paid from user to user. There is no bank or financial institution that gets between the payer and payee. It’s PayPal, Venmo, or —to throw in some old school — Western Union without the transfer costs and the go-between.
As a means of payment, there may be many good reasons for you to hold cryptocurrency. Which reason and how to best invest in the crypto markets is best left to financial advisors. In fact, advisors themselves and their brokerage firms are increasingly seeing the benefit of cryptocurrency. Because it is more frictionless than other forms of payment, cryptocurrencies can save institutions massive amounts of money in trading and settlement costs. We’ll explore in next week’ column which financial institutions are using cryptocurrency’s infrastructure and what that may mean for investors and financial advisors alike.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.